Question

2. Describe a situation in which you experienced or observed the problem of moral hazard. Can you suggest any possible solutions that may help correct the problem in this case? Be as specific as possible.

Answer 1

Moral hazard refers to the situation in which there is reduced incentive to exercise care once there is an insurance coverage . This phenomena is mostly seen in insurance industry . Moral hazard problem can be mostly observed in health insurance . People after buying an health insurance start driving , smoking and drinking recklessly since they know that any medical expenditure would be covered by the insurance .

The solution to correct the problem is this case will be high premiums . High premiums cover such costs of moral hazard problems . Sanctioning of insurance money or granting claims only after proper inspection of accident or reason behind ailments .